QUESTION

First and Foremost, thank you for the wonderful tips that you present on YouTube as to how to buy new cars. I used some of your tips such as "walk away" with my firm offer, and the one about "blame the person who is not there" for your spending limit. They are really good!

Anyways, for convenience I did take a loan offered from dealer, but they kept pushing me towards the taking gap shortfall insurance. I resisted and did not take it. My thoughts were that although it does make sense, in theory, I did not want to spend another $800 on top of the loan (plus interest on it for five years) just to make sure that if my car gets written off, the shortfall is paid to the lender.

I believe that if I get a comprehensive insurance policy (with the likes of GIO and NRMA) then that should cover it off in the event my car is written off? Especially if I based that insurance on an agreed value instead of market value. What are your thoughts? Thank you in advance.

ANSWER

Hello Sid,

You are very welcome. I’m glad you’re finding the reports useful. Those tips work, huh? Car dealers hate them... (Perhaps these two facts are related.)

It’s a great deal for the dealer to keep selling you stuff - especially when they wrap it all up in the finance. When this happens, they make a handsome profit on the items they sell - regardless of whether they are physical products like mats, tinting or headlamp protectors (or stuff you really never need like fabric protection, rust protection or paint protection) or intangibles like insurance for this and insurance for that. They also then make a greater commission on the finance, owing to the larger sum involved.

However, financing an $800 insurance premium over five years makes it pretty expensive insurance for you.

You are absolutely correct that if the agreed value remains greater than the amount payable to the financier in the event of a write-off then the comprehensive policy will cover you. The car, if written off in a crash, will mean you are due the agreed value, and the insurer will usually pay the financier direct, and send you the balance (if any). Of course, if the agreed value is less than the amount payable for early termination of the finance agreement then you will be required to make up any shortfall, and the insurance company will pursue you for this amount.

It's always a great idea - for this, as well as other obvious reasons - to structure the finance so that the amount outstanding over time tracks well in line with the reasonable value of the vehicle. Unfortunately, many buyers want a better car than they can really afford, and some financiers will assist with this, or at least facilitate the acquisition, by allowing things like unrealistically high balloon payments at the end of the term, in order to reduce the monthly payment amount.

You should be aware that the amount payable to the financier will be the balance outstanding plus any early termination fees built into the agreement. You must read the fine print here, because these fees can, at times, be substantial - depending on the particular agreement’s terms and conditions.

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